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December 23, 2008
Were Sales Leaders Independent Contractors or Employees?

Fourteen former sales leaders for Cornerstone America claimed that they were misclassified as independent contractors and that the company owed them overtime wages.

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What happened. Cornerstone, the sales and marketing division of Mid-West National Life Insurance Company of Tennessee, has about 1,200 sales agents who agree to work as independent contractors. Those who are promoted to “sales leader” are bound by contract to remain as independent contractors, have fewer opportunities to engage in sales themselves, and recruit, train, and manage a team of sales agents.

Although there is no formal relationship between sales leaders and their subordinates, the leaders’ primary income comes from overwrite commissions on subordinates’ sales. Cornerstone controls the hiring, firing, assignment, and promotion of sales agents; determines leaders’ territories; does not allow the leaders to sell other insurance products or operate other businesses; and controls the distribution of all sales leads.

Sales leaders receive no employment benefits, and Cornerstone does not withhold wages for income tax purposes. In general, their attendance at Cornerstone meetings and training is optional.

Fourteen former sales leaders—four district sales leaders, nine regional sales leaders, and one area sales leader—filed suit against Cornerstone and its parent companies, alleging that they were employees under the Fair Labor Standards Act (FLSA) and, as a result, should have received overtime wages. (The FLSA does not apply to independent contractors.)

A district court ruled in favor of employee status for 13 of the 14 former sales leaders, saying that judicial estoppel barred the other sales leader from asserting employee status because he had claimed to be an independent contractor in a sexual harassment lawsuit unrelated to this case.

Cornerstone appealed to the U.S. Court of Appeals for the 5th Circuit, which covers Louisiana, Texas, and Mississippi, arguing that the district court erred in concluding that the sales leaders were employees. The sales leaders cross-appealed, saying that the remaining sales leader should also be considered an employee for purposes of the FLSA.

What the court said. The appeals court affirmed the district court’s decision that the sales leaders were employees under the FLSA and vacated the estoppel decision.

 “The sales leaders worked exclusively for Cornerstone for significant periods of time and lacked the ability to exercise true initiative within the business model,” the appeals court explained. “Cornerstone controlled the geographic territories, the choice of products to sell, and the price of those products.”

The court continued, “Cornerstone unilaterally determined the number of sales leads the sales leaders could receive and effectively prevented the sales leaders from selling competing products or operating other businesses. Perhaps most importantly, Cornerstone controlled the foundation of the sales leaders’ ultimate success—the hiring, firing, assignment, and promotion of the subordinate salespeople on whom the sales leaders relied.”

Although one sales leader had asserted in a previous case that he was an independent contractor, that is not relevant in this case, the appeals court said. “Despite the semantic inconsistency, it is legally possible to be an employee for purposes of the FLSA and an independent contractor under most other statutes” (Hopkins et al. v. Cornerstone America et al., No. 07-10952, U.S. Court of Appeals, 5th Cir., 2008).

What to Remember

  • Make sure workers are properly classified. The appeals court said it considers five nonexhaustive factors in determining whether a worker is “economically dependent” on an alleged employer or in business for himself: “(1) the degree of control exercised by the alleged employer; (2) the extent of the relative investments of the worker and the alleged employer; (3) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer; (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship.”
  • Consult with an attorney. If you are unsure how a worker should be classified, check with a qualified legal professional. In this case, even though contracts for the sales leaders specified that they were independent contractors, the court said they were employees.
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